Weak growth, higher prices to be seen in data

WASHINGTON (MarketWatch) -- An economy being slammed by tepid growth and bubbling inflation will get no reprieve from the economic data to be released this week.

Most of the economic news is expected to show more of the same: weak growth and higher prices.

"Overall, the reports ... will point in the direction of a fairly significant slowdown in both production and demand in the fourth quarter," wrote Global Insight economists Nigel Gault and Brian Bethune in their weekly outlook.

It'll be a busy week for data and for speeches from Federal Reserve officials. The highlights will include another appearance by Fed Chairman Ben Bernanke, plus October data on retail sales, industrial output and inflation.

The consumer is in the crosshairs, so the report on retail sales has to count as the most important economic release of the week. Of course, there'll be plenty of attention paid to the consumer-price index, which is expected to show another steady gain in prices.

Retail

Retail sales are expected to be up just 0.2% in October, economists surveyed by MarketWatch said, following soft reports from both the chain stores and the automakers. Sales will be slightly better excluding autos, up 0.3%, the survey says. The data will be released on Wednesday.

The big unknown is whether discretionary purchases, such as eating out or entertainment, were hurt by the gloom that's descended over consumers.

Retail sales were "sluggish," Gault and Bethune said. Other economists used words like "lackluster," "soft," "disappointing" and "weak." You get the idea.

The chain stores reported their worst October sales month since 1995. Some of the blame can be laid on the warm weather that probably kept apparel sales down. Most people don't buy new winter clothes until they need them.

But other categories likely were soft as well, including home-related items such as furniture, appliances and hardware, economists found.

"Although employment and incomes advanced, soaring oil prices and declining home values have made consumers cautious," Bethune and Gault said. "We may be seeing more of the housing and credit crunch trickling down to America's economic engine, consumers," commented Avery Shenfeld, an economist for CIBC World Markets in his weekly outlook.

The big unknown is whether discretionary purchases, such as eating out or entertainment, were hurt by the gloom that's descended over consumers. The big jump in gasoline prices came late in the month, and might not have had much impact on discretionary spending.

If October comes in as weak as economists think, it'd start the fourth quarter off on a "soft note," said Citigroup Global Markets economist Robert DiClemente. "Real consumer spending growth could be below 2% this quarter, as spending may be dampened further in coming months by the rise in energy costs and the implied hit to discretionary income."

"The fourth quarter is shaping up to a tough quarter," Gault and Bethune added.

CPI

The other big event comes on Thursday, with the consumer-price index for October. Economists are looking for a fairly uneventful 0.3% rise in overall inflation, with another 0.2% gain in the so-called core rate, which excludes food and energy costs.

Energy prices were actually fairly flat for the month, but they usually fall in October, so the seasonal adjustment will translate that into a small gain -- enough to push the overall CPI up 0.3%, economists for Credit Suisse said.

The big hit from energy prices will come in the November and possibly the December CPIs.

The year-over-year gain in the index will show a sharp increase to about 3.5% from 2.8% last month, largely because gasoline prices were so low last October, averaging $2.29 a gallon compared with $2.85 this year.

The acceleration in the year-over-year CPI doesn't really mean much that we didn't already know, but it "may be a reminder to the bullish bond markets that inflation isn't exactly licked," CIBC's Shenfeld said.

Production

Industrial production likely rose just 0.1% in October, given the decline in the factory workweek, economists say. Growth in industrial production is running about a percentage slower than its long-term trend of 3%, despite strong growth in exports.

"This 'below-trend but not recession' performance looks similar in spirit to the low 50-zone ISM readings of recent months," according to Credit Suisse economists Neal Soss and Jay Feldman. The Institute for Supply Management index fell to 50.9% in October, close to the line between expansion and contraction.

All this points to weak economic growth. The Blue Chip survey of economists now estimates fourth-quarter growth at 1.7% and the first quarter at 1.9%.

"Growth will most certainly slow over the next two quarters, but we will see growth," wrote John Silvia, chief economist for Wachovia. "While some analysts have been quick to jump the gun and declare that the U.S. economy is already in recession, we continue to believe such talk is foolish."

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